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You can contact the author (Teguh Hidayat) by email, teguh.idx@gmail.com. The author live in Jakarta, Indonesia.

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Nippon Indosari Corpindo

If you use a standard
method of valuation, then with PER of 22.3 and PBV of 5.2 times at the price of
Rp1,085 per share, Nippon Indosari
Corpindo (ROTI) at first glance seems unattractive. However, if we talk
about ‘wonderful company’ like this company, then we probably can not afford to
buy it at a ‘wonderful price’, or in other words, the current price is fairly
reasonable and worth the buy. And indeed, ROTI is a wonderful company (in
Indonesian language, ‘roti’ means bread), and I'll tell you why.

ROTI is a bakery
company and the owner of ‘Sari Roti’
brand, one of the most famous brand of bread products in Indonesia. The Company
was founded in 1995 by Wendy Yap, in the form of foreign direct investment from
Japan (the Japanese investors are still become the shareholders of the company
until today). Ms. Wendy is the daughter of Piet Yap, one of founders and
general manager of the largest wheat flour producer in Indonesia, Bogasari, since the company's founding
in 1969 until the 1990s. So it seems like ROTI has secured its wheat flour
supplies directly from Bogasari since the very beginning, and to this day ROTI
still buy flour from Indofood Sukses Makmur (INDF), the parent entity of
Bogasari.

ROTI operate its first
bakery in Jababeka Industrial Estate in 1996, in the same year for the brand ‘Sari
Roti’ was launched. Although Indonesia was hit by the financial crisis a year
later, but the plant is still a huge success, until in 2001 the company
increase its production capacity. In 2005 the company opened its second plant
in Pasuruan, East Java, followed by the third plant in Cikarang, in 2008. Finally
in 2010, with the status as an already market leader in the mass-market bread industry in
Indonesia, ROTI held an IPO with the initial price of 1,275, or Rp255 per share
after the stock-split (ROTI conduct a stock-split in the ratio of 1:5 in 2013).

(Note: Bread industry
in Indonesia is divided into three segments, namely the home-industry/home made
production, mass production (at the plant/bakery), and boutiques (such as BreadTalk,
Holland Bakery, etc.). The home industry bread is a low quality bread that is
sold at low prices in traditional markets and groceries not far from the
location of production, and does not have a brand. While mass-produced bread,
or you can call it mass-market bread, is a medium quality bread that is sold at
the groceries, mini markets, to the supermarket, the products can reach a more
wide market (hundreds of kilometers from the bakery site), and have brands. The
price is slightly higher than home industry bread, but the quality is also much
better. While the boutique bread is usually produced and sold in the same place
(and at the same time), namely in stores or shopping malls, and also have
brands.

And ROTI plays in the segment
of mass-market bread, with a market share of more than 90%. Indonesian bakery industry
has a value of approximately US$ 2 billion in 2014, and 20% of them coming from
mass-market segment.

I think ROTI can be
considered as a 'wonderful company', and here’s why:

Business of bread/bakery, as
well as instant noodles, flour, or any other food, is relatively immune to the
crisis, and it can be seen from the fact that the company was able to grow and
flourish in the late 90s at the eve of monetary crisis. And in 2008, when
Indonesia was once again affected by the US financial crisis, ROTI built three bread
factories in Cikarang instead.

ROTI have a priceless
brand equity, ie the famous 'Sari Roti' brand. If you have the stock of Trada Maritime
(TRAM), then you may be confused when someone asks, 'Trada Maritime? What company
is that? A marine company company?' But if you hold this ROTI, then you can
immediately answer, 'This is the one which makes Sari Roti, you know!'

With more than 90% market
share in its segment, ROTI can be referred to as a monopoly company. However, because
the consumption of bread in Indonesia is still relatively low, ROTI is able to
expand its business until today (so the company's growth prospects are still wide
open), usually by setting up a new bakery. Since its IPO in 2010 until today,
the company has set up at least seven new bake factory in Medan, Palembang,
Makassar, Cikande (Tangerang), Cibitung (Bekasi), Purwakarta, and Semarang.

The company produces bread
with a range of selling prices that reach all consumers, ranging from dorayaki
at a price of Rp4,000 per pcs, until soft-milk bread at a price of Rp17,000 per
pcs.

Between 2007 - 2012, ROTI
net earnings continue to rise for an average of 50% annually. And in the first
half of 2015, the earnings still grew by 23.0% over the same period of the
previous year, when most of other company’s earnings began to slowing down
because of poor conditions of economy.

Unlike the other bread
products that only sold in stores or boutiques, ROTI probably the only bakery company
in Indonesia that sells its products by coming up to the customers, with its
famous Sari Roti carts.

Well, I think that’s why
Salim Group, one of the largest
conglomerate in Indonesia, also invest in ROTI by acquiring a 31.5% stake in
2013, through Indoritel International Makmur (DNET). And Salim Group’s presence
in the management of the company would further strengthen the company's
position, because now ROTI can synergize with Bogasari (wheat flour producer
belonged to Salim Group) to obtain supplies of raw materials, and also with the
retail chain of Indomaret (belonged to Salim Group, too) to market its products.
If all goes well, ROTI may join with Indofood CBP (ICBP), another Salim Group company,
as companies that successfully market its products overseas (if you live in
Netherlands or Nigeria, please check the grocery stores near your house, you
may find the flagship products of ICBP, Indomie).

And fortunately Salim Group
has been well known as a good conglomerate, especially when compared with
Lippo, Sinarmas, or Bakrie. ROTI financial statements are fairly clean with a
reasonable amount of debt (there are two bonds worth a total of Rp1 trillion
issued in March and June 2015, but with low interest rates ie 8 – 10% per
annum, so it does not interfere with company earnings). So we can say that ROTI
is now in the hands of the right management.

And what about the
shares?

As already mentioned
above, at the price of Rp1,085 per share, ROTI scored PER and PBV of 22.3 and 5.2
times respectively, and it certainly is not an attractive valuation, especially
in the current market conditions where there are a lot of other stocks,
including consumer goods stocks, which have much lower valuations. And ROTI
itself is already gained of more than 300% since its IPO. Based on experience,
the best timing to buy expensive stocks like ROTI is when the company posting a
financial performance that is not as good as usual, for example, when its
profits fell, or if the company has certain problems which caused investors
dispose the shares. In such conditions, ROTI may down to a level where its PBV
would be 2 or 3 times only.

But since 2007 until today,
or perhaps since even longer, ROTI’ net earnings has always been rise steadily,
as well as its equity. As far as I can observe, ROTI also never get caught with
the problems nor legal cases. And, face it, for a good consumer goods company
like this ROTI, it is very difficult to imagine that the company would be
caught in serious trouble in the future, just like Kalbe Farma (KLBF), Unilever
Indonesia (UNVR), HM Sampoerna (HMSP), or ICBP, that will also continue to
operating well from time to time.

And if the valuation of
ROTI compared with valuation of ‘super stocks’ which have already been mentioned
above, then PBV of 5 times still seems low, is not it? Actually in 2013 ROTI
had climbed to Rp1,800 per share but then dropped, though the financial
performance was still fine, because the price was indeed too high. But at the
current price, PER of 20 - 25 times are still relatively reasonable for a stock
with excllent fundamentals and bright outlook. If you're asking for stocks to
be owned for 2 – 3 years from now or longer, ROTI may be the answer.